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Penny Stocks: Stockpick Whiz Kid

Written by: MainStreet07/24/13 - 2:23 PM EDT

NEW YORK (MainStreet)-- The investment in penny stocks can net huge returns. Since the business of trading over-the-counter stocks (OTC) is a "make or break" proposition, you need to apply a lot of preparation and investigation to each stock. To boot, this type of investment is very volatile and could change 20% to 30% one day, and not trade again for a month. OTC stocks are very risky.

Penny Stocks are considered "unlisted stocks" or "over-the-counter stocks" whereby they are not applied to a certain stock exchange like the Dow Jones, Nasdaq or the S&P 500. Instead they are under the (OTCBB) "over the counter bulletin board" or the "pink sheets." Penny stocks are not traded under the large exchanges because of the requirements the small companies lack; instead they have small capital, low outstanding shares or small per share prices. There are different definitions to what is considered a penny stock. Some traders say below $1.00 or $3.00, but according to the Securities and Exchange Commission (SEC), anything under $5.00 is considered a penny stock.

Investing in penny stocks is usually not a short term investment. When buying shares of a company at such a low price, you want to sit on your position and wait until the stock reaches a limit that is appeasing to you. While most stocks trade a minimal amount each day, sometimes it is difficult to acquire or liquidate your investment.

Before purchasing a certain stock, you need to fully understand what the company (and the attached OTC stock) does and its current financial situation. Pick a sector that you believe has the potential to grow. This could include the biotechnology, healthcare, natural resource, etc. Make sure to look at the stocks past and chart history. If they had a dramatic uptrend or sharp dive, what caused it? Has that problem been resolved or why was the stock trading so high at a certain point? You could look into the ownership of the company, since it is public information, and see the main shareholders and what they did in their past. Were they successful? Questions like these are standard for picking the right stock because of the "make or break" situation